Mourning the late, great housing boom

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By Jim Flynn

In an October column we did a mini seminar on the sub-prime mortgage mess. During the late, great housing boom, mortgage companies and banks were borrowing low-interest money, lending it to home buyers, then selling off bundles of mortgages to dumb investment banks, not-so-smart hedge funds, and other cocky high-rollers.

Things may be darker than revealed so far. New York and Connecticut are investigating whether lenders were slipping in “no document” and “exception” loans, which made the bundled mortgages even more risky for investors.

When the nontraditional loans began to look shaky, big-name stock brokerages, sophisticated banks, and the Federal Reserve entered the nervous zone. The Fed called it a liquidity crunch, meaning not enough money available to keep the game going. So they loaned more low-interest money to the banks. That’s right; the government does not control the money supply, only the presses on which money is printed.

U.S. business has given up making and selling stuff. Manufacturing was being moved overseas many years before Americans took notice. Those who lost their jobs noticed immediately.

American business is now about money shuffling – borrowing, lending, and leveraging. The Savings and Loan Scandal began in the late 1970s, followed by the dot-com stock collapse, and now the sub-prime mortgage debacle. As in the booming 1920s, business has become mesmerized by money manipulation.

Washington would prefer that we not to know the messy details. The White House and Congress are like the third monkey. They see and hear the evil, but they prefer not to talk about it.

One of the most incongruous comments to come from a president was uttered by Mr. Bush when asked at a press conference what citizens could do to support the invasion of Iraq. “Go shopping,” he said. He was serious. Shopping is the 21st century national tranquilizer.

Consumer borrowing and spending have been a mainstay of our economy. We’re on a merry-go-round called denial. We’re not shopped out, but we’re getting very close to being borrowed out.

A side effect of the mortgage crunch is erosion of house values. Prices which rose rapidly are still falling. The drop in values affects not only those looking to sell their homes, but also those who took out home equity loans to go shopping.

Another effect of declining home prices is the loss of value with which boomers were expecting to finance their retirement years. For the first time since the government has been tracking home values, Washington expects the total of what homeowners own (the equity) will be less than the total of what they owe (mortgages and home equity loans) by the end of this year.

The president has urged banks and mortgage companies to help homeowners refinance or modify their loans. Washington is buying time by applying feel-good lotion, hoping the rash will go away.

The financial institutions are not pleased. Banks, brokerages, and pension funds which own bundles of shaky mortgages feel they’re being pressured to accept even greater losses than they’re already anticipating from defaults.

We have difficulty working up sympathy for greed gone wrong. Hundreds of supposedly sane lenders suspended disbelief, as if they were actors in a fictional movie. They convinced themselves there was no ceiling to home prices and loan values.

When the bubble went “poof,” there was a collapse of trust among lenders. Nobody wanted to loan more money to anybody, unless new loans were secured by a pledge of everything the borrower will ever own, including burial plots and dog houses.

Meanwhile, even in homes not threatened with foreclosure, owners may be examining their credit obligations and may conclude gloomily that “shopping as we know it is over dear.” The president will not be pleased.

Buyers who were hustled into zero down, 100 percent mortgages and may eventually lose their homes can take small comfort from the fact that they never really owned anything.

However, whatever mortgage payments they did make were actually rent with a bonus – a tax deduction for interest paid.

Jim Flynn was formerly a corporate counsel, served in military intelligence during the Korean War, and once aspired to be a newspaper columnist.